- The US Producer Price Index rose more than expected in February.
- There was a decline in US initial jobless claims, showing a still-tight labor market.
- Retail sales in the US rose but missed forecasts.
Interest futures, including the US Treasury Bond, fell on Thursday after data revealed a jump in US wholesale inflation. As a result, investors lost a bit of confidence that the Fed would cut rates in June. This led to an increase in short-term Treasury yields, reflecting interest rate expectations.
US consumer and wholesale inflation (Source: Bureau of Labor Statistics)
The US Producer Price Index rose more than expected in February. The PPI rose 0.6%, beating forecasts of a 0.3% increase. This came after another jump in consumer inflation, raising concerns about renewed inflation. Persistent inflation might keep the Fed from cutting rates in June. Notably, after the wholesale inflation report, the likelihood of a June cut fell to 59.9% from 65%.
Investors are holding on to hope that the Fed will cut rates because Powell confirmed this when he testified before Congress. However, data after that testimony has shown that inflation remains persistent. Therefore, there is uncertainty over the outlook for rate cuts.
Consequently, investors will pay keen attention to next week’s Fed policy meeting. The Fed will likely maintain current rates. However, traders will focus on the messaging regarding future policy decisions. If policymakers sound less dovish after the recent inflation figures, it could lead to a bigger decline in rate cut expectations.
Other data from the US revealed a decline in initial jobless claims, showing a still-tight labor market. A tight labor market is another reason why the Fed has delayed rate cuts. However, the last major jobs report revealed a higher-than-expected unemployment rate. Initially, there was hope that this would allow the Fed to start cutting rates. However, the following data on inflation brought more confusion to the market.
Meanwhile, retail sales in the US rose but missed forecasts, showing a decline in consumer spending due to high inflation. Although data shows that the US economy is slowing down, it might not be enough to push the Fed to start cutting rates as inflation remains high.
When the Fed first signaled a pivot, investors were expecting almost eight cuts in 2024. However, that has dropped significantly to three cuts. If the data continues to show stubbornly high inflation, this figure might drop further in the coming months. A continued drop in rate-cut bets would weigh on interest futures.
